Misallocation and Human Capital Accumulation Over the Life Cycle

We develop a life cycle occupational choice model with worker and firm heterogeneity and endogenous human capital accumulation. We calibrate the model to the United States using data on schooling and firm size and use it to study the effect of size-dependent distortions in skill accumulation and productivity. In an application to North African countries, we found that removing the size-dependent distortions increases GDP per capita of North African countries by a range of 2.75 times to 4.5 times, a result that is largely accounted for by the human capital accumulation of workers during the life cycle. Increasing the fraction of high-skill workers to the level of the U.S. without addressing firm-level misallocation falls short in closing the gap between developing and developed countries. These results support the view that the lack of incentives and opportunities for human capital accumulation is an important cause of differences in output per capita in developing economies